Last month the Bank of England raised interest rates to 4 per cent – the 10th consecutive increase –  to tackle the cost of living crisis. 

While the mortgage markets have stabilised since the autumn of last year, the corresponding increase in the costs of mortgage debt over the past year is the single biggest factor currently affecting the UK housing market, putting downward pressure on prices and suppressing activity among those most heavily reliant on mortgage debt as a source of funding.

Even though outstanding mortgage debt (£1.66 trillion) only accounts for 19 per cent of the total value of the UK’s housing market (£8.68 trillion), the future path of interest rates also holds the key to what happens to house prices and market activity over the next 12-24 months.

This is because younger, more debt-dependent buyers move more regularly than older, equity rich homeowners. Indeed, our analysis of HMRC and UK Finance data shows that buying activity is typically greatest among those in their early thirties, even though buying power peaks for buyers in their mid to late forties, when buyers are able to draw on a combination of debt and equity to spend an average of £410,000+ on a house purchase across the UK as a whole.

This also indicates that higher mortgage rates will have different impacts in different parts of the market. For example, it suggests that activity and pricing in higher value prime markets will be less exposed to interest rate rises, even if they are not entirely immune to the impact of higher debt costs and wider market sentiment.

That will also most likely have a geographical element, in particular given the distribution between outright and mortgaged owner occupation shown in the maps below which we have produced using data from the 2021 census.

Locations with highest proportions of outright owner occupation, mortgaged owner occupation and private renting 

Further information

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